Fitch Says Holiday Retail Sales Could Be Weakest in 20 years
Fitch Ratings expects that the 2008 holiday season will be extremely challenging for retailers and could be the weakest season over the past two decades.
Real retail sales turned negative in the back to school period for the first time since 2001 and are expected to remain negative for the balance of 2008. This is particularly significant for the department stores as well as specialty apparel and electronic retailers as the fourth quarter represents about 30% of sales and up to 50% or more of operating earnings for these companies. Promotional activity will be substantial and broad based to drive customer traffic and clear excess inventory.
For 2009, Fitch expects that these trends will continue as consumers curtail discretionary spending and look to maximize value. Comparable store sales growth for operators selling clothing, home related goods, and other discretionary categories is expected to continue to be negative while those companies that have built a strong value perception and have strong private and exclusive brand offerings will outperform their peers.
The growth in personal consumption expenditures is projected to be -1.6% in 2009 and the rate of growth is expected to remain below trend into 2010.
The strong value messages of the discounters will continue to draw consumers from all income levels. Food and consumables will continue to drive store traffic and those operators, such as Wal-Mart (NYSE: WMT) and Costco (NASDAQ: COST) with broad grocery offerings will outperform.
Supermarkets will continue to benefit from their broad non-discretionary product offerings and convenient store locations. For example, Kroger’s (NYSE: KR) strong value image has resulted in it continuing to report industry leading mid-single digit non-fuel identical store sales.
Drug retailers are also expected to benefit from their mainly non-discretionary merchandise offering despite the challenging environment.
Fitch expects department store same store sales trends to be considerably weak through 2009 and credit metrics to weaken from current levels. Fitch expects well-run and well-capitalized operators to increasingly consolidate share as weaker operators with thin operating margins and liquidity issues exit the market.
Consumer electronics demand is expected to slow as much of the new product adoption has already taken place and incremental price declines will not be adequate to stimulate demand. Given the weak sales trends, Best Buy’s (NYSE: BBY) abilities to adjust inventory levels and operating costs as well as preserve liquidity will be key rating drivers.
Home improvement retailers are anticipated to remain pressured by weak sales as consumers continue to cut back on spending in this category. Share consolidation for Home Depot (NYSE: HD) and Lowe’s, (NYSE: LOW) which account for less than 20% of the market, is possible despite these companies slowing their store growth to focus on strengthening existing operations.
Specialty apparel retailers, particularly those with poor fashion content, will continue to experience negative sales growth on weak demand. Fitch expects sales for toy retailers to show relative strength as parents continue to purchase toys for their children although the transaction size is expected to decline. Fitch expects office products retailers to be pressured as small business spending tightens in line with a slowing economy, but retailers that provide an easy shopping experience and strong execution are expected to outperform their peers.
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